Whether the global economy is teetering on the brink of recession is a big question, and some are even arguing the UK is already there. What’s certainly true is markets have had a hard time in the first half of the year, and this is reflected very clearly in our fund universe.
For the second time in 40 years, bonds and stocks have both posted losses for two consecutive quarters under pressure from interest rates, inflation and tightening profit margins for corporations.
UK-domiciled funds have certainly been feeling the squeeze too. Performance-wise, almost 90% of all the funds under our coverage are down in the first half of the year, with the worst-hit fund losing more than half of its value.
At the top of the table, we find AQR Managed Futures, a fund that also did well overall in June. So far this year, it has returned 44.44%.
But the big sector at the top is energy and natural resources. BGF World Energy is up 38.89% and JP Morgan’s two natural resources funds – which were both among the worst performers in June – are up between 15-18% in the year so far.
Somewhat more surprising in the chart is Fidelity China Focus. China had an abysmal end to 2021 but the category has started making a recovery in the last quarter. However, this fund is the only China fund appearing this high up – the next China fund sits at around top 40.
Sterling itself has also been a contributor in keeping some fund categories higher than others. Its fall against the dollar has made a difference in the performance of the Morningstar Global Markets index; in USD, the index is down 20% year to date, but in GBP, its only down 10%.
Ben Yearsley, director at Shore Financial Planning says:
"The stats speak for themselves; it’s been a tough year with only the 11% falling in sterling helping offset the pain of equity markets. There have been some bright spots with clearly energy and commodities being the main two, but also other areas such as insurance which are seen as boring are showing their worth in a rising rate environment. Equity markets often look ahead and predict what will happen in the wider economy – on that basis we are in for a tough six months.”
At the bottom of a list of many bad performers, who’s surprised to see US large-caps and technology? Morgan Stanley accounts for the worst three with a growth and two advantage funds.
Following in Morgan Stanley’s footsteps is T. Rowe Price with its global tech funds. Both are down around 45%, while Baillie Gifford has three global funds in the bottom: two large-caps and one small/mid-cap. These are all down 35-38%.
Looking Ahead
So what can we expect for the coming months? According to Morningstar Investment Management (MIM), there’s no use sugar-coating how badly the second quarter played out for most investors and attention is likely to remain on the threat of inflation and a potential economic recession.
"Behaviourally, this is an important time to remain grounded principally," the MIM team says.
"Looking ahead, we continue to believe stocks and bonds are fabulous assets to help people reach their goals, especially following the healthy rebound in yields.
"Stocks and bonds offer different mechanics, performing differently in various market environments – making them ideal core assets for the majority of investors. Further, following recent losses, the valuations for both stocks and bonds have improved, which is a broad positive that will help investors in the next chapter of their investment journey."
